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By Andrew T. Donahue, Senior Appraiser; & John T. Schmick, Vice President
The Constitution grants government the power of Eminent Domain: the right to take private land for public use. In return for taking private property, the condemning authority must provide just compensation to the owner. Most of us are familiar with the many public-use projects such as highways, roads, utilities, schools, hospitals and the like, where private land is taken for public use. Increasingly however, cities have allowed the use of condemnation for private-use projects (economic redevelopment). When commercial developers cannot acquire the land parcels they want using traditional means, they ask the city to use its power of Eminent Domain to condemn the land and acquire it for private development. Thus, one private enterprise is permitted to take land from another for private, not public use. Indeed, the U. S. Supreme Court's decision in the Kelo Case (2005) essentially confirmed that the government does have the power to take private property for whatever reason it deems necessary. At the same time, however, the Court indicated that states have the right to enact their own laws governing Eminent Domain procedures.
If a government entity can take personal property from one owner and give it to another for non-public purposes, what protection does the individual real property owner have? In response to citizen outrage over the Kelo decision, many states began the process of re-evaluating and re-structuring their own Eminent Domain laws. In 2006, Minnesota joined this growing number of states and modified its Eminent Domain procedures to offer some protection to individual real property owners and to provide a modicum of fairness to the application of the law.
Many of our appraisers and analysts attended a Continuing Legal Education seminar in which various aspects of the new Minnesota laws were discussed. Certain terms, conditions and methodologies were clarified. This article focuses on four of them:
In general, the reader may assume that publicuse projects (roads, utilities, and other municipal building projects) will continue to be approved by the courts, as they have in the past. The changes discussed herein affect primarily takings intended for private use.
TAKINGS FOR ECONOMIC DEVELOPMENT
One of the most notable changes deals with the parameters of a taking for economic development. In the past, a city had the power to designate an entire area as blighted or contaminated and proceed to acquire all the properties with the idea that new developments would increase the city's tax revenues. Prescriptive standards and definitions have now been added to the appraisal and negotiation requirements of a taking. Consequently, blanket description takings (all of the properties within a defined area) are no longer permitted. The terms blight and contamination are now applied to each individual property and include the requirement that more than 50% of the properties designated for a taking must meet the criteria for 'structurally substandard' or contaminated.
Structurally substandard is defined as "a building that was inspected by appropriate local government authorities and cited (emphasis added) for one or more enforceable housing, maintenance, or building code violations". While the definition provides specific reference to building components, the key factors of the approved definition are that the code violations have not been cured despite two notices of non-compliance and that the cost to cure the violations "would cost more than 50 percent of the assessor's taxable market for the building, (emphasis added) excluding the land". Further, the new law now describes an "environmentally contaminated" area as one where 50% of the parcels contain contamination and the estimated cost of dealing with that contamination is more than the assessor's estimated market value for each parcel.
The practical reality of this definition is that homeowners and other building owners must be given a chance to bring their properties up to code in order to avoid having their properties designated as blighted or contaminated for condemnation purposes. In order to determine if the government has met the required 50% threshold necessary to establish blight/contamination, property owners must now obtain cost-to-repair estimates, appraisals and, perhaps, legal counsel. Still unresolved is who pays for these expenses. Restricting the use of blight or contamination as the basis for a taking gives private property owners some small measure of control over the taking process.
The new law also established, for the first time, a public hearing requirement for proposed condemnations involving blighted areas or environmentally contaminated areas. The local governing body must hold such a hearing and then wait at least 30 days before approving the taking. The resolution of approval must identify the public costs and benefits of the project, as well as state how the acquisition serves a public use and why the property is needed. In addressing a major sore spot for many property owners, the new law requires the condemning authority to sell the property back to the former owner at the lower of the original price or the current fair market value if the condemning authority determines that the property has not been used for public use or is no longer needed for a public use. Unfortunately for property owners, this particular rule applies to some, but not all government entities. Finally, when a taking is approved, the relocation assistance package, once determined almost exclusively by the condemning authority, will now be set forth by an independent administrative law judge if the displacing person does not accept the condemning authority's offer.
A note of caution: the new law does provide a "feasible alternative" clause for the condemning authority. Specifically, the law reads "condemning authorities must not take buildings that are not structurally substandard unless (emphasis added) there is no feasible alternative to the taking...in order to remediate the blight..." Essentially, this gives government the right to go forward with a project even if some of the properties in the designated area are not blighted. However, the burden to minimize the taking of buildings that are not substandard or contaminated rests with the government entity, not with the owner.
COMPENSATION FOR LOSS OF GOING CONCERN
Minnesota's Eminent Domain law now recognizes the necessity of compensating owners for loss of going concern. This refers to the loss of business value and includes losses for both owners and tenants. The changes to Section 117.186 are likely to generate a fair amount of controversy. The most challenging part of this section will be interpreting the first sentence of subdivision 2: "If a business or trade is destroyed by a taking, the owner shall be compensated for the loss of going concern&" The law previously provided no compensation for business loss except in very limited circumstances. The new law requires that the owners and/or tenants receive compensation for the loss of a going concern if the business is destroyed as a result of the taking, unless the condemning authority proves by the preponderance of the evidence that the loss is not due to the taking. As yet undetermined is how one assesses whether the business is destroyed. When an owner or tenant seeks damages as a result of a loss of going concern, what objective criteria will be used to make that judgment?
An owner seeking damages for loss of going concern must give notice to the condemning authority within 60 days of the first court hearing. Additionally, sufficient documentation relating to the loss must be given to the opposite party at least 14 days prior to the hearing. Moreover, when an owner or tenant is forced to relocate, the amount of damages payable must be sufficient to purchase a comparable property in the community (emphasis added). The condemning authority may not, however, require an owner to accept a substitute or a replacement property as part of the compensation due. Further, the condemning authority must reimburse the owner or tenant up to $50,000 in re-establishment expenses.
COMPENSATION FOR RELOCATION
Unfortunately, there is no clear definition of 'community'. If the property is taken in the city of Richfield, does this mean a replacement property must also be within the city of Richfield? We anticipate that the government will no longer be able to require a property owner to move across the metro area to relocate. A decision as to what constitutes a reasonable relocation will have to come from the courts. In addition, if a replacement property costs more than the property taken, it appears that the higher number will qualify as the minimum compensation. A project such as the Best Buy development in Richfield, where numerous small businesses lost their properties, is a prime example of the dilemma of relocation within a community. All of these owners were in the same market at the same time looking for the same type of replacement property. Basic economics tells us that when supply is limited and demand suddenly increases, prices for comparable properties will escalate. It becomes a seller's market.
The condemning authority must also pay compensation, not to exceed three years' previous revenues, minus the cost of goods sold, if the government permanently eliminates 51% or more of the driveway access to a business and that removal results in a loss of revenue of 51% or more for that business.
While business owners now have the opportunity to receive compensation for the loss of their businesses, it appears that the threshold to qualify for that compensation is quite high. What happens to the business that suffers only a 40% loss of its defined revenues? Clearly there would be a loss of value in real economic terms but no avenue for compensation. We anticipate that the courts and/or the legislature will have to clarify this section. We also suspect that there will be a fair amount of litigation on the topic before the question reaches the Minnesota Supreme Court.
REIMBURSEMENT OF PROFESSIONAL FEES
The guidelines for reimbursement of professional fees also changed dramatically. Prior to the changes enacted in 2006, a property owner was entitled to reimbursement of appraisal fees (from the condemning authority) up to $1,500 regardless of how much it actually cost the owner to hire an appraiser. Despite the fact that many government officials recognized how unfair this limitation was to property owners, few supported a change in the law. The new bill attempts to address the unfair advantage the condemning authority has over the property owner in obtaining an appraisal. Section 117.036 (2b) states: "an owner is entitled to reimbursement for the reasonable cost of the appraisal ...up to a maximum of $1,500 for a single family or two-family residential property and minimum damage acquisition (emphasis added) and up to $5,000 for other types of property..." A minimum damage acquisition is defined as "an interest in property that a qualified person with appraisal knowledge indicates can be acquired for a cost of $10,000 or less." The problem with the definition for minimum damage acquisition is that appraisers often do not agree on value estimates. Most of the litigation surrounding Eminent Domain takings is based on the fact that the property owner does not agree with the compensation for damage offer. It is likely that this $10,000 threshold will be a source of disagreement as will the low level of reimbursement for appraisal fees in these types of acquisitions.
Finally, in yet another remarkable departure from the previous law, Minnesota law now allows a court the discretion (emphasis added) to award attorneys' fees if the final award is between 20 and 40% higher than the condemning authority's last written offer before filing the condemnation petition. If the award is more than 40% greater, the court must (emphasis added) award attorneys' fees. However, no attorneys' fees will be paid if the final award is less than $25,000, which is defined as a minimum damage threshold. This type of reimbursement schedule has long been sought as a means to bring some fairness into the Eminent Domain process. Perhaps the condemning authorities will view the new guidelines as incentives to reach an agreement on the value of compensation with the property owner in takings cases in order to avoid costly litigation. Given the adversarial nature of most Eminent Domain proceedings, we anticipate that the government will not accept a fixed fee appraisal contract as 'reasonable'. Reasonable fees are likely to be based on the amount the government pays its expert. Those contracts are usually awarded to the lowest cost bidders and reflect economies of scale for appraising multiple properties at one time. Generally, they do not reflect appraisal fees available to individual property owners for appraisal services in the marketplace.
CONCLUSION
In this article, we commented on some of the changes to Eminent Domain laws enacted by the Minnesota Legislature in 2006. Certainly, there are other details within the new law that may be applicable to individual takings cases. All in all, these are extraordinary changes: steps in the right direction. The new law more fairly and accurately recognizes the extent of the burden a taking places on the property owner as well as the true costs of public and private projects that use the Eminent Domain law to acquire property. We encourage our readers to contact their attorneys whenever a taking is proposed and to be aware that the new changes may require that appraisers be brought into the Eminent Domain process much earlier than in the past.
Shenehon Company
88 South 10th Street, Suite 400
Minneapolis, Minnesota 55403
Phone: 612.333.6533 / Fax: 612.344.1635
ValuationSpecialist@shenehon.com
